D&#233;j&#224; vu, Texas

Oct 05, 2007

Article By: Scott Burns

by Scott Burns

Lately I've been getting that déjà vu feeling. If you lived in Texas through the S&L debacle of the late ‘80s, you probably have too. If you didn't, listen up. What happened to houses in Texas back then may be the template for what happens across the country as the housing bubble pops today.

Many of the circumstances are similar. Consider this list:

A boom environment. Back then, Texas had been in a long building boom fueled by
rising oil prices. Housing prices had risen nicely for years. Many Texans who
had started with next to nothing were enjoying a new feeling of wealth as they
moved from one appreciating house to another. Today, home prices across the
country have been rising handsomely for years, creating unexpected wealth for
millions of homeowners.

Finance frenzy. Back then, the savings and loans were encouraged by changed accounting rules to make big development loans, booking unearned profits. Today, Wall Street has
built the perfect pipeline of profits from lending money to selling securitized
loans to European and Asian bag holders. In both cases, someone else would pay
the price for bad loans, the FDIC then or investors today.

Down payments. Back then, Texas home buyers were advised to put as little as
possible down because Texas laws prohibited borrowing equity out of your house.
So many put only 5 percent down--- an amount that would be wiped out by selling
costs. Today, we've been through a long period of lax financing. The Nitwit
Sector (lending) has rushed to provide 100 percent financing to people with no
history of debt repayment.

Low interest rates. Back then, builders marketed houses by "buying down"
mortgage interest rates for a year or two. After that, the interest rate and
monthly payment rose. Many saw their payments rise as the value of their houses
fell. Today, adjustable loans start with "teaser" rates that reset much higher
in a year or two. New owners are seeing their payments rise as their home value
falls.

Employment.
Back then, construction employment loomed large in Texas. So did employment
in finance and banking. Today, construction workers are leaving Florida and
other boom areas because construction is coming to a halt. Mortgage brokers are
losing their jobs across the country.

To track the consequences, I went
to the website for the Office of Federal Housing Enterprise Oversight,
otherwise known as OFHEO. There I examined the indexes of housing prices. The
indexes are particularly valuable because (1) they track only houses purchased
with conforming (under $417,000) loans, and (2) they track same property
transactions. They provide a good measure of the paycheck homebuyer economy,
and they aren't bent by sudden infusions of dramatically more expensive houses.
Also, they track only single-family home prices, not condos.

While the national index figures
reflect the illusion we most favor--- a steady and virtually guaranteed rise in
home prices--- a very different picture emerges when you examine price indexes
by state or metropolitan area. Here are some examples.

Houston, the first Texas city to fall in the oil
bust, had its home price index peak at 108.5 in 1983. It also bottomed early,
hitting 81.5 in 1987. But it was a long bottom--- the index didn't recover to
its 1983 level until 1997. So recovery from the market top took all of 14
years.

San Antonio peaked in 1984 at 109.7, didn't
bottom out until it hit 82.5 in 1990, and didn't recover to its old high until
1995, a period of 11 years.

Austin peaked in 1986 at 100.1, falling to 72.7
in 1991, and reaching recovery in 1994, about 8 years.

Dallas also peaked in 1986 at 110.1, bottomed at
94.3 in 1989, and regained its old peak in 1997, a period of 11 years.

The Texas template tells us we
could be in for a 14 to 25 percent decline and an 8 year to 14 year wait for
recovery. That's real history. It's not hyperventilation from the Chicken Little
chorus.

You should also know that big-time
housing comedowns aren't unique to Texas. Comedowns also hit other markets. It
happened in La-La Land. Los Angeles peaked in 1990, bottomed in 1995, and
wasn't fully recovered until 2000. And it happened in Beantown. Boston peaked in 1988, bottomed in 1992, and
hit its recovery number in 1997.

Bottom line: Love your house for
the shelter and peace it provides.

Sidebar:

How Are
Houses in Your Area Doing Versus Inflation?

Here's how
to see how houses in your area are doing relative to inflation. First, visit
the OFHEO website and download the residential data file for metropolitan
areas. Open the file and pick a date that means something to you, like when you
purchased. Write down the index number. Scroll down the listing until you get
to the most recent quarter. Write down that index number.

Now, go to
the inflation calculator on the website of the Minneapolis Federal Reserve
Bank. Enter the year and first index number you selected. Hit "calculate." The
new number in the bottom box is the index number your area would have to hit if
home prices were to keep up with inflation.

Here are
two examples. The Nashville area home price index was 75.39 in 1986, and it is 188.52
currently. If the 1986 index number kept up with inflation, it would now be
141.36, so Nashville housing is doing better than inflation.

Dallas, on the other hand, was 110.9 in 1986 and is only
167.37 today. To have kept up with inflation, its index number would need to be
206.49. So Dallas housing has trailed inflation.

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.